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Cannabis Investing: Does Revenue Even Matter?

Cropped view of a customer paying cash at a coffee shop to the worker behind the counter. The focus is on the hands and money.

Investing in the cannabis industry has moved beyond just hype, with investors now able to evaluate more than a dozen public companies generating substantial revenue as cannabis producers and/or retailers or providers of goods or services to the industry, with several focused solely on Canada.

Revenue generation is a key indicator, but it's not necessarily rewarded by investors in the short term.

In creating and updating this tracker, we decided to exclude companies that don’t file with the Securities Exchange Commission (SEC) or on Canada’s System for Electronic Document Analysis and Retrieval (SEDAR). We also include only cannabis-related revenue for companies that operate in other industries.

Today I want to dig in a little deeper and look at the big revenue generators in the United States. First, though, I want point out that generating significant revenue is not a guaranteed predictor of a rising stock price, especially in the short term.

When looking at start up companies like these it’s important to evaluate other factors like cash burn, the competitive landscape, management strength, access to capital, and strength of balance sheet. It’s also imperative to look at market capitalization (the value of the company), because sometimes the price of admission is just too high.

CV Sciences, which sells CBD products derived from industrial hemp and is developing a CBD/nicotine gum, generated sales of $4.08mm in Q2.

MPX Bioceutical (which just changed its name from Canadian Bioceutical and also trades in Canada on the CSE with the symbol MPX), has vertically-integrated cannabis cultivation and production operations in Arizona, Maryland, Massachusetts and Nevada. MPX produced sales in Arizona in its Q1 ending 6/30 of $3.99mm (C$5.11mm converted at $0.78 USD to the Canadian dollar).

mCig, which has moved beyond its original focus of low-end vape pens to a more diversified business, reported sales of $3.17mm in its Q1 ending 7/31, primarily from cultivation facility construction.

GW Pharma, which has received approval to sell Sativex in 30 countries, actually has no U.S. sales yet, as the drug isn’t yet approved for sale here. So perhaps it shouldn’t be on this list. The biotech firm, which just filed a New Drug Application with the FDA for its drug Epidoliex—to treat rare forms of childhood epilepsy that are intractable—generated global sales of $3.14 million in its Q3 ending 6/30.

Investors Aren’t Rewarding Revenue

I made the point earlier that rising sales aren’t a guarantee that the stock price will rise as well. To illustrate the point, consider the performance of the seven stocks discussed over the past six months. With the exception of Terra Tech, which is up less than 2%, the group has experienced serious declines, with CV Sciences and mCig dropping more than 39% since early May.

For those who want to explore this group further, it is quite diverse, with three direct cannabis companies, three ancillary plays and a biotech company. Each has varying growth rates, different degrees of balance sheet strength and access to capital and deviations in near-term profitability. GW Pharma, on one valuation extreme, has a market capitalization of about $3 billion, while CV Sciences is valued at just $17 million.

Buyer Beware

A final caveat: Sometimes companies lie—even those that file with the SEC. Older readers will likely recall the deceit that brought down Enron and WorldComm, and those who don’t should make themselves aware of the risk of accounting fraud. One of the earliest cannabis stocks, formerly Medbox and now Notis Global, was sued by the SEC earlier this year for fictitious sales. This is why it’s important to dig deeper than just a cursory look at a company’s publicly stated financials. My own review of Medbox resulted in my expression of extreme caution about the company from 2013 onward.

Bottom line: Investors no longer have to buy into the cannabis sector on hype alone, as several companies are now generating substantial revenue. Still, caution is warranted, even among this group, as investors should look beyond just this single factor.

Next up: A review of the upcoming earnings reports from the 2 leading Canadian cannabis companies in terms of sales, Canopy Growth and MedReleaf. Talk with you in two weeks.

New Cannabis Ventures is proud to offer fact-based, data-driven, financial information and official company news about each publicly-traded client. Being a client of New Cannabis Ventures is not a recommendation of the company. In determining which public companies are eligible to be a client of New Cannabis Ventures, they must meet a minimum standard. Meeting these criteria is not a guarantee that New Cannabis Ventures will accept a company as a client. For more information, see the New Cannabis Ventures disclaimer page.

Alan Brochstein, CFA, covers the cannabis industry full time from Houston, running 420 Investor, a subscription-based service for those interested in publicly-traded cannabis stocks, and New Cannabis Ventures, a news and information platform that highlights promising companies and influential investors in the cannabis industry. Before focusing on the cannabis industry in 2013, Alan worked as an independent equity research analyst following two decades as a portfolio manager, trader, and analyst.

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